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Bank Buyout Could Spur European Mergers

The purchase of Britain's Abbey National by Spain's Santander Central Hispana could herald the beginning of long-awaited consolidation in the European banking sector. But the German market remains troubled.

Is Abbey National the first step in the consolidation of European banks?

The shock waves unleashed from the announcement that Spain's Santander Central Hispana would buy Britain's Abbey National weren't restricted to the towering, glass and steel punctuated urban landscape of the City of London. The ripples could also be felt in offices that make up Frankfurt's skyline, where many observers see this sparking a wave of consolidation in the European banking sector.

Britain's Abbey National said Monday it would approve a proposed takeover offer from Spain's biggest bank, Santander Central Hispana. The deal would create the world's 10th largest bank, and experts believe it could be first bang of a long-awaited consolidation trend in the European banking sector. Santander's board of directors approved the purchase on Sunday evening, seeking to pay €13.6 billion to buy Abbey, Britain's sixth-largest bank. If the deal goes through, it will mark the first time a British bank has been taken over by a European competitor.

Is Germany next?

Frankfurt's skyscraper's are the headquarters to Germany's biggest banks

The move has led to new speculation of high-level mergers in Germany, where the fractured banking landscape has languished in recent years.

"Following today's offer from Santander for Abbey, the banks will all become clearly become takeover candidates again," a stock trader in Frankfurt told the Reuters news agency. Another broker told the agency: "This is going to spark speculation about German banks as the subjects of takeovers and mergers again."

On Monday, the stock prices of HypoVereinsbank (HVB), which has been shopping for a buyer, Commerzbank and Deutsche Bank all rose by about 1 percent on the news.

Deutsche Bank headquarters in Frankfurt

Deutsche Bank (photo) held merger talks earlier this year with the US-based Citigroup. And Munich-based HVB and Frankfurt's Commerzbank are have often taken part in merger or takeover talks. HVB has reportedly been searching for a partner in recent months with at least four different banks, including the ABN Amro, BNP Paribas, Credit Suisse and Santander. Though the talks ended without any action, a wave of consolidation could give new impetus to foreign investors seeking discounts in Germany.

Hurdles make buyouts less attractive

However, recent gains in share prices at HVB and Commerzbank could make them less attractive targets.

Additionally, structural barriers also make the German banking market less attractive to foreign investors. For one, the private banking market here is dominated by the state-protected Sparkassen, or savings banks. Because of the deeply segmented market, most of the private banks in Germany have profit margins that are too weak to interest many foreign banks. Another factor in Germany is that workers' councils are given powerful seats on the board of major German banks and have voting rights in major strategic decisions.

And Germany's biggest private player, Deutsche Bank, has indicated it wants to increase its own profits before entering into the European consolidation game.

Upside potential

Yet despite the difficulty in making structural changes in the German banking system, foreign investors say the relative bargain prices or upside potential of banks here make them attractive takeover targets. For example, hough it has a relatively low market capitalization of around €11 billion, HVB holds a potentially lucrative 78-percent ownership of Bank Austria, which is strong in Eastern Europe.